Erin Cronin – We have just completed buying the freehold on our leasehold house. Due to the seller’s delays this turned out to be a very long drawn out process. Erin was such a help and was very determined to get us through to completion. We are extremely grateful for all her hard work and determination.
Phil, Rayleigh
James Foley-Bronze – If your looking for a friendly and efficient solicitors in Rayleigh then I can highly recommend Palmers. We had excellent advice and were kept well informed throughout the selling process by James our contact at Palmers. Thanks again for all your hard work.
Three terms you need to know to avoid wrongdoing when managing insolvency
If your business is in financial distress or it looks like you won’t be able to meet your financial obligations, there may be certain things that you need to do to meet legal requirements and repay your commercial debts to the best of your ability.
Failing to do this can be described by three terms:
- Misfeasance
- Malfeasance
- Nonfeasance
These represent three types of wrongdoing that result from failing to act or act appropriately.
In the context of insolvency, committing any of these types of wrongdoing can result in further action being taken, so it’s important to understand how to avoid wrongdoing in the course of insolvency proceedings.
Misfeasance
Misfeasance means that you failed to carry out a duty correctly without the intent to cause harm.
Applied to corporate insolvency, the term typically refers to actions by company directors or officers that are lawful in nature but carried out in a manner that is negligent or breaches their fiduciary duties.
This can include making decisions that harm the company’s creditors, such as selling assets at undervalue, in order to raise capital quickly.
This is clearly not in the creditors’ best interest, but it was not done maliciously – in fact, it was done with the intent of repaying a portion of the company’s debts quickly.
Malfeasance
Malfeasance is deliberately failing to carry out a duty properly or doing something in direct contradiction with a duty with the intent to cause harm.
Within the framework of corporate insolvency, this term covers actions taken by company directors or officers that are illegal or fraudulent.
Examples include misappropriating company funds, falsifying company accounts, or engaging in fraudulent trading practices.
Malfeasance is often considered to be a more severe offence than misfeasance, as it involves deliberate wrongdoing.
Nonfeasance
Nonfeasance denotes a failure to act at all when there was a duty to do so.
In relation to corporate insolvency, nonfeasance might involve directors failing to keep adequate financial records, not filing required documents with the Government, or failing to act when the company is insolvent to mitigate losses to creditors.
What happens next?
When a business becomes insolvent, acts of financial wrongdoing can significantly affect the outcome for creditors, shareholders, and other stakeholders.
Directors and officers may face personal liability for debts or damages arising from these actions, especially if their conduct contributed to the company’s insolvency or exacerbated the financial situation.
Misfeasance, malfeasance, and nonfeasance can all trigger legal actions against the directors, leading to fines, disqualification from holding directorships and in severe cases, imprisonment.
The law imposes strict duties on directors and officers to act in the best interests of the company and its creditors, particularly when there is a potential for the business to become insolvent and default on debt payments.
It is essential for directors and officers to understand their duties and the distinction between these forms of misconduct.
Acting responsibly and in line with your legal obligations is a must to minimise the damage to you and your business caused by insolvency.
Our team of experts can advise on navigating corporate insolvency – contact us today.
Having the right employment contracts – tips for SMEs
Whether your business employs only a handful of employees or thousands, employment contracts are a legal obligation all employers must comply with.
Having these contracts in place allows you and your staff to know exactly where you stand in terms of obligations and rights, whilst also providing legal protection should issues arise down the line.
Lisa Judd, our Head of Employment & HR Advisory, goes into the importance of secure contracts for SMEs and what should be included.
When should contracts be introduced?
Contracts should be provided from the first day of employment.
Legally, you do not have to provide a written contract but instead a statement of main terms. However, if you do not provide a written contract, that does not mean that there is no contract in place. Taking on an employee automatically generates a verbal contract, based on any discussions and what happens in practice, which can lead to dispute. It is for this reason that it is recommended for both employers and employees to have a written contract in place.
A well drafted employment contract also increases the options available to an employer when dealing with common workplace issues e.g. giving the employer the ability to make deductions from wages that otherwise they could not make, for any sums due to the employer.
What to include
Employment contracts are made up of both express terms (those stated in any written contract and implied terms (implied by fact, law, custom and practice).
Express terms should include:
- The names of the employer and employee
- The date the employment commenced
- Terms setting out remuneration and contractual benefits.
- Working hours
- Job title and duties
- Any probationary period
- Place of work
- Notice terms
- Holiday entitlement and pay
- Terms relating to any requirement to work outside the UK
- Whether any collectively agreed terms apply
Care should be taken to identify whether any benefits offered e.g. sick pay or bonus/commission are contractual or discretionary.
In addition, employers may wish to include some form of post-termination restrictions in order to protect their confidential information. These will not be appropriate for all employees but may be very important for certain types of client-facing employees.
Implied terms include:
- Duties on employers to provide work and pay
- Duties on employees to be ready willing and available to do it and to obey reasonable instructions and to exercise reasonable care and skill
- A duty of mutual trust and confidence between employer and employee
- A duty of fidelity
- A duty on employers to take reasonable care of the health and safety of their employees (including both physical and mental health)
- A right to reasonable notice
It is best to include all of the terms in writing when drafting a contract. This ensures that there are no misunderstandings with what is expected of both employees and employers. In addition, employers may wish to include some form of post-termination restrictions in order to protect their confidential information. These will not be appropriate for all employees but may be very important for certain types of client facing employees.
Different types of contracts
Typically, employers might want to have Directors Service Agreements, a contract for more senior employees and one for more junior employees.
They may also need contracts for staff who are full time or part time, who only work part of the year, or who have irregular or no guaranteed hours.
Sometimes it is sensible for employment contracts to be in the form of a deed rather than a simple contract, for example when new terms like longer notice or restrictive covenants are introduced without some additional consideration (e.g. without their being accompanied by a pay rise, bonus or promotion).
Updating contracts
It is important to keep contracts up to date to reflect any changes e.g. in employment laws or arising from any change in the role or seniority of the employee.
Currently it is sensible for employers to be checking whether the way they calculate holiday pay is fully compliant with recent statutory changes, especially for employees who work overtime so regularly that it might be considered part of their normal remuneration.
Simple contractual changes purely benefiting the employee, like updating remuneration provisions e.g. for the recently announced increase to the National Minimum Wage (effective April 2024) can be done by way of a simple letter confirming the rise.
For more extensive changes, especially those more for the employer’s benefit or not having immediate binding effect (like changes to notice or port termination restrictions) it is sensible to take implementation advice.
This will usually be to consult and to endeavour to get the employee to sign to confirm not just their receipt of new terms, but their acceptance of them, but there are other options available where agreement cannot be reached.
If you need help with employment contracts, get in touch with one of our experts today.
Sharing success: The legal considerations of setting up employee share schemes
In the evolving landscape of corporate governance and employee incentives, employee share schemes (ESS) are gaining traction as a means for companies to align the interests of their employees with those of the business.
Among these, the Enterprise Management Incentive (EMI) and Employee Ownership Trust (EOT) schemes stand out for their potential to drive growth, enhance employee engagement, and facilitate succession planning.
As more and more businesses explore the benefits of ESS, it is important that they consider the unique legal implications of passing on part of their business to their team.
The Rise of Employee Share Schemes
The increasing popularity of ESS is no coincidence. In an era where talent retention and motivation are paramount, these schemes offer a tangible way to reward employees not just for their present contributions but also for their role in the company’s future success.
The EMI and EOT, in particular, have garnered attention for their favourable tax treatment and flexibility, making them attractive options for both employers and employees.
The ESS have also been shown to be a positive way to encourage employee “buy in” and commitment, as staff feel a stronger connection to their place of work, thanks to the financial opportunities on offer.
Enterprise Management Incentives (EMI)
The EMI scheme is designed for small to medium-sized enterprises (SMEs) with high growth potential, allowing them to grant share options to key employees as a form of non-cash remuneration.
The legal framework governing EMIs is intricate, with strict eligibility criteria for both companies and employees.
Companies must navigate these regulations carefully to ensure compliance and maximise the scheme’s benefits, which include tax advantages for both the employer and the employee.
Key considerations for setting up an EMI include:
- Company eligibility: The company’s gross assets must not exceed £30 million, and it must operate in a qualifying trade. Your company needs to operate independently, meaning another company should not own or control over 50 per cent of its ordinary share capital. Additionally, there must be no existing arrangements for such ownership or control to occur. If your company owns any subsidiary companies, these subsidiaries must also meet the criteria for EMI eligibility. Specifically, if they are subsidiaries managing property, your company must own and control at least 90 per cent of them.
- Employee eligibility: EMI options are available exclusively to employees who commit to working a minimum of 25 hours per week. For those working fewer hours, at least 75 per cent of their total working time must be dedicated to the company. Additionally, employees holding a ‘material interest’ in more than 30 per cent of the company’s share capital prior to the granting of options are ineligible to participate.
- Limitations: There is a limit on the value of shares that can be held under EMI options, which currently stands at £250,000 per employee.
- Granting Options: The process of granting options must comply with specific legal requirements, including the terms of the option and how it is communicated to the employee. The most that a company can grant is £3m in unexercised options at any one time.
Employee Ownership Trusts (EOT)
EOTs represent a different approach to employee share ownership, where a trust acquires a significant stake in the company on behalf of all employees.
This model promotes a collective ownership culture, with employees benefiting indirectly through the trust.
The EOT has become a popular mechanism for succession planning, particularly among companies looking to preserve their legacy while ensuring their workforce is invested in the company’s future.
Legal considerations for establishing an EOT include:
- Structure: The trust must be established with the sole purpose of holding shares for the benefit of the employees.
- Control: There are specific requirements regarding the company’s control and the trust’s operation, including the appointment of trustees.
- Benefits: While the EOT offers tax efficiencies, such as relief from Capital Gains Tax on the sale of shares to the trust, companies must comply with various conditions to qualify for these benefits.
Additional legal considerations
Setting up an EMI or EOT scheme is not without its challenges. Companies must consider the legal implications, including compliance with tax laws, corporate governance standards, and employment regulations.
Additionally, the process involves meticulous planning and documentation to ensure the scheme is implemented effectively and aligns with the company’s strategic objectives.
The decision by owner-managers to create ESS may also bring them in conflict with other shareholders without proper consultation, leaving them open to litigation in the most serious circumstances.
These two share schemes are only part of several share schemes made available to employees and there may be other options that are more suited to your business.
Ultimately…
Employee share schemes like EMI and EOT are powerful tools for fostering a shared sense of ownership and commitment among employees.
However, the success of these schemes hinges on a thorough understanding of the legal landscape and meticulous planning.
Companies contemplating the introduction of an ESS should seek expert legal advice to navigate the complexities involved and ensure that their scheme not only complies with the law but also aligns with their business goals and culture.
To find out more about our corporate legal services, including our expertise in shareholder arrangements and company structures, please contact us.
Leasehold Bill the first step in addressing challenges facing homeowners in the UK
Currently at Committee stage in the House of Lords, the Leasehold and Freehold Reform Bill aim to offer enhanced protections for homeowners of leasehold properties – but campaigners are calling for further intervention.
The Bill would outlaw the creation of new leaseholds on houses and flats, as well as making it easier for leaseholders to purchase the freehold on their homes.
However, many argue that there needs to be support for existing leaseholders, including those who face increasing ground rent and other costs which are seeing some being threatened with eviction.
Our property law expert, Carey Jacobs, addresses the challenges facing many leaseholders in the UK and what needs to be done to support them in the long term.
How do leasehold properties work?
“When many people think of leasehold properties, they think of rental units,” said Carey.
“However, a decent number of owner-occupied properties are leasehold, most of these flats or apartments. Individuals or families own the unit in which they live but not the ground or the communal spaces within the building, which means they are still liable for ground rent.”
As a result, leaseholders may face higher costs than freeholders in similar properties.
When this leaves leaseholders unable to meet high rental costs or unwilling to due to rising rates, the freeholder can threaten to take possession of the property through the Courts if there is a breach of lease.
Enhancing protections
Leaseholders only need to owe a relatively small three-figure sum in order for freeholders to apply for repossession, although many are faced with far higher debts when they are unable to cope with rising costs.
“Additionally,” said Carey, “leaseholders often find themselves paying outstanding costs before the proceedings reach the Courts, despite finding costs unreasonable.
“It would be highly beneficial for leaseholders to have more protections in place over the significant investment they have already made in purchasing a property.
“From our perspective, it will be interesting to see where legislation around leasehold properties takes the residential property field and how this will impact the needs of homeowner clients in the coming years.”
For advice on leasehold properties and changes to leasehold legislation, please contact our Residential Property team today.